5 Public Utility Division Cause No. PUD EXECUTIVE SUMMARY BACKGROUND/PURPOSE FOR STUDY The Oklahoma Legislature adopted Senate Concurrent Resolution 74 in May 2004, and created the Task Force on Deregulation of the Oklahoma Telecommunications Service Provider Industry (Task Force). The Task Force was charged with advising the Oklahoma Legislature in its efforts to determine the necessity and feasibility of abolishing certain statutory provisions relating to the telecommunications service provider industry in the State of Oklahoma. At its November 2004 meeting, the Task Force recommended that the Oklahoma Corporation Commission (Commission) continue to conduct proceedings to determine the appropriate regulation of telecommunications service providers and to make a report to the members of the Task Force. This Study is the culmination of Staff s efforts to provide the Commission with sufficient information, data and analysis to support its decision-making process. SURVEY APPROACH & DESIGN In order to collect the required Oklahoma-specific information, Staff issued a series of Data Requests to all known telecommunications service providers operating in Oklahoma. Due to the breadth of the undertaking, requests were issued to all identified carriers, regardless of type, that fall under the jurisdiction of the Commission. Staff requested data from 543 service providers and ultimately received responses to the various data requests from 234 companies, for a 43% response rate. Staff also conducted a series of Technical Conferences to allow carriers to review and discuss the information submitted and to resolve, or at least identify, any discrepancies in the data. The Technical Conferences were open to all members of industry and the general public. HISTORY OF OKLAHOMA TELECOM REGULATION As a part of its Study, Staff prepared a detailed history of telecommunications regulation in Oklahoma since passage of the 1996 Federal Telecom Act and identified a number of strengths and weaknesses of current Commission Rules. Some of the major initiatives and accomplishments during this period included: Implementation of the provisions of the 1997 Oklahoma Telecom Act, which established guidelines for administration of statewide universal service and 911 funding; Design and implementation of an alternative regulation plan; Development of innovative approaches to managing the assignment and use of limited numbering resources; April 5, 2005 i

6 Public Utility Division Cause No. PUD Encouraging the growth of advanced data services, which culminated in agreements with service providers to invest in broadband deployment throughout the State; Promoting competition by overseeing the process of opening incumbent networks to competitors and performance monitoring; and Conducting collaborative Rulemakings designed to streamline procedures and reduce unnecessary regulatory burdens. ECONOMIC IMPACT OF DEREGULATION ON INDUSTRY & CONSUMERS Deregulation is the process of removing restrictions and regulations. The resulting economic impact on industry and consumers would be dependent upon many factors, including the degree of deregulation, the process used to implement the transition to a less regulated environment and the degree of market concentration, or the level of effective competition. Although competition can be defined many ways, true customer choice depends on the existence of effective competitors. Effective competitors can be viewed as companies that offer substitute products and garner sufficient market share, across a sufficient number of competitors, to ensure that one or a few firms cannot control the market prices or output levels. Staff analyzed the Oklahoma local wireline market based on a commonly used index for calculating market concentration and the results show that the local wireline market is still highly concentrated, indicating that the majority of the market power lies in the hands of a small number of firms. GENERAL DISCUSSION POINTS Analysis of revenue trends indicates that total statewide telecommunications revenue has demonstrated little growth since 2001, falling within a general range of $1.6-$1.7 billion annually. Yet while the revenues of large ILECs and IXCs declined by $110 million and $34 million, respectively, between 2000 and 2004, the revenues for wireless carriers increased by approximately $489 million over the same period. When focusing on local wireline service, the competitive numbers in Oklahoma lag the national average in terms of CLEC market share. Competitive local exchange carriers captured approximately 13% of the voice lines in the State in 2004 but the national average CLEC access line share is roughly 18%. CLECs also accounted for only 5% of the total Oklahoma retail revenues and just 12% of the local service revenues in Whether due to competitive forces, network unbundling requirements, or declining revenues, the local service capital investment in Oklahoma has declined by almost 49%, or $159 million dollars since The notable exception is the fact that capital expenditures by small, rural ILECs actually increased by almost 30% over this period. April 5, 2005 ii

7 Public Utility Division Cause No. PUD The data collected in this proceeding indicates that although the CLEC market share in Oklahoma is on the lower end of the national spectrum, their competitive presence is improving. CLEC line share has gradually increased since 2000, and of the 537 telephone exchanges in the State, there are currently 270, or a little more than 50%, with at least one CLEC present. Additionally, almost 40% of the exchanges in the state have 2 or more CLECs serving customers and approximately 10% of the exchanges have at least one facilities-based CLEC along with at least one other CLEC. If the CLECs can translate this expanded footprint into an increased relative market share, the level of competition in Oklahoma will improve. Alternative technologies to traditional, wireline services continue to show promise but have yet to demonstrate an ability to serve as substitutes for local service. Wireless carriers have demonstrated substantial revenue and subscriber growth in recent years but this has not translated into equivalent line losses for local wireline providers, primarily because the majority of consumers view wireless as a complementary service with different functionality. Voice over Internet Protocol currently enjoys a lower cost structure than traditional telephony, as well as favorable regulatory treatment by the FCC, but technological improvements in many areas are needed before this service will garner mass appeal. Broadband over Power Lines is another technology that may increase consumer choice for high-speed Internet access but it is currently not suitable for carrying signals over long distances and is still in the developmental stage in most areas. CONCLUSION/RECOMMENDATIONS The current data demonstrates that although some degree of competition may be materializing in Oklahoma, the local wireline competitive numbers lag the national average in terms of CLEC market share. The trends are indicative of the fact that CLECs are establishing a footprint in the state, however, with Oklahoma on the lower end of the national spectrum for CLEC market share, the Commission should continue to pursue its efforts to attract additional competitors in order to create a more vibrant local market. New alternative technologies currently in their formative stages represent potential sources for increased competition as they demonstrate improvements in reliability, quality and service capabilities. However, the data shows that these alternatives have not yet materialized as substitutes with mass market appeal. Competition cannot be viewed as a frozen state or evaluated only at a point in time; it is better represented as a continuum with varying degrees or levels. Further, the level of competition that may exist at any point in time does not mean that the degree of competition will remain at that level or increase. Business markets are dynamic and may become more or less competitive depending on a variety of factors such as mergers, acquisitions, bankruptcies or regulatory actions. For these reasons, it is necessary to periodically study and monitor the competitive nature of markets. April 5, 2005 iii

8 Public Utility Division Cause No. PUD STAFF RECOMMENDATIONS Based on the data collected and analyzed in support of this Study, Staff recommends the following: 1) The OCC should continue to review and revise its telecommunications Rules with the objective of reducing regulatory oversight as market conditions warrant. The current level of regulation may be appropriate for today s market, but the Commission should adamantly pursue a policy of monitoring and reevaluation to proactively address change. 2) The OCC should continue to work with carriers in all segments of the industry to ensure that Rules are appropriate and evolutionary in nature. Working with all segments of the industry should include the proliferation of rules that encourage new market entrants, regardless of the technology employed, to establish a presence as local service alternatives, whether via traditional or non-traditional means. 3) The OCC should develop a definition of effective competition, or true customer choice, using an approach that evaluates the competitive nature of a market by accounting for relative market shares and the number of effective competitive choices available to customers. 4) The OCC should use the information contained in this Study to establish a baseline set of data and initiate a process to perform regular, comprehensive reviews of the state of competition in Oklahoma. This would afford the Commission the opportunity to maintain current market information and to study trends over time while also investigating relevant issues and factors as they arise in the future. April 5, 2005 iv

9 Public Utility Division Cause No. PUD DEFINITIONS & ACRONYMS ACCESS LINE - the facility provided and maintained by a telecommunications service provider that permits access to and/or from the public switched network. ACCESS SERVICE - any tariffed wholesale service provided by one LEC to another LEC, CLEC, IXC or an end-user, that allows for access to the local exchange telecommunications network, excluding local interconnection arrangements. ADSL - Asymmetric Digital Subscriber Line. A high speed transmission technology that uses existing copper wires from a central office to a customer premise. ADSL modems on both ends of the transmission send high speed signals that carry more information downstream (from the carrier) than upstream (from the customer). BASIC LOCAL SERVICE - all residential and business telecommunications voice and/or relay service which meets the standards set forth in O.A.C. 165: (Minimum Service Standards), including lines beyond the first line into a residence or business. BASE RATE AREA - the developed area within each exchange service area designated in the tariffs of the telephone company or if not so designated, an area within one-half (1/2) mile radius of the serving central office. BROADBAND OVER POWER LINES (BPL) - the provision of Broadband utilizing electric power lines for the high-speed transmission of data services. BROADBAND SERVICE - High speed Internet access service or broadband service means, as used in 17 O.S. Section , those services and underlying facilities that provide upstream, from customer to provider, or downstream, from provider to customer, transmission of data in excess of one hundred fifty (150) kilobits per second, regardless of the technology or medium used including, but not limited to, wireless, copper wire, fiber optic cable, or coaxial cable, to provide such service. BUNDLED RETAIL LINE - a retail line combined with any one of the following: at least one key service, long distance, DSL, wireless, video service, etc. CALEA - the Communications Assistance for Law Enforcement Act. CENTREX - short for Central Office Exchange service, a type of PBX service in which the switching occurs at a local telephone station instead of at a company premises. Typically, the telephone company owns and manages all the communications equipment necessary to implement the PBX and then sells various services to the company. COMPETITIVE ACCESS PROVIDER (CAP) - a company that provides exchange access services via a private network, independent of a Local Exchange Carrier. April 5, 2005 Page 1 of 52

10 Public Utility Division Cause No. PUD COMPETITIVE LOCAL EXCHANGE CARRIER (CLEC) - with respect to an area or exchange(s), a telecommunications service provider that is certificated by the Commission to provide local exchange services in such area or exchange(s) within the State of Oklahoma after July 1, COMPETITIVE PROVIDER - an entity providing the same or equivalent service through the use of its own or leased facilities, including resellers. The service must satisfy the Commission's rules of minimum service standards regardless of whether the provider is regulated by the Commission. COMPETITIVE SERVICE - a telecommunications service determined by the Commission, after notice and hearing, to be subject to effective competition for a relative geographic and service(s) market. COMPETITIVE TEST - an evaluation by the Commission to determine, after notice and hearing, for a particular service on an exchange-by-exchange basis, the existence of competition between an ILEC, a non-affiliated facilities based Competitive Provider, and one (1) other non-affiliated Competitive Provider. CUSTOMER - any person, firm, partnership, cooperative corporation, corporation, or lawful entity that receives regulated telecommunications services supplied by any telecommunications service provider or IXC. DIGITAL SUBSCRIBER LINE (DSL) - a broadband data service provisioned using the existing telephone wires. ELIGIBLE TELECOMMUNICATIONS CARRIER (ETC) - a telecommunications service provider as designated by the Commission pursuant to O.A.C. 165: and 47 U.S.C. 254 and 214(e). Also identified as a CETC, or Competitive Eligible Telecommunications Carrier. END-USER - a customer to whom a telephone number is assigned. END-USER COMMON LINE CHARGE - the flat rate monthly interstate access charge allowed by the FCC that contributes to the cost of local service. ENHANCED SERVICE - a service that is delivered over communications transmission facilities that: (1) change the content, format, code or protocol of transmitted information; (2) provide the customer new or restructured information; or (3) involve end-user interaction with information stored in a computer. EXCHANGE - a geographic area established by an incumbent LEC as filed with and/or approved by the Commission for the administration of local telecommunications service in a specified area, which usually embraces a city, town, or village and its environs. It may consist of one or more central offices together with the associated plant used in furnishing April 5, 2005 Page 2 of 52

11 Public Utility Division Cause No. PUD telecommunications service in that area. In Oklahoma, Rural exchanges are those with less than 20,000 access lines, Suburban exchanges contain between 20,001 and 100,000 access lines and Urban exchanges are those with 100,001 or more access lines. EQUAL ACCESS - the ability of end users to access any long distance carrier by dialing 1 and the phone number, rather than a long string of dialing codes. FACILITIES-BASED PROVIDER - an entity providing telecommunications services predominantly through the use of its own facilities, including UNEs, and other technologies capable of meeting all local telecommunications service requirements while complying with the Commission's quality of service rules. FCC - the Federal Communications Commission. FTA (or Federal Telecom Act) - the Telecommunications Act of 1996, Pub. LA. No , 110 Stat. 56 (1996). FERC - the Federal Energy Regulatory Commission. INCUMBENT LOCAL EXCHANGE COMPANY (ILEC) - with respect to an area or exchange(s), any telecommunications service provider furnishing local exchange service in such area or exchange(s) within the State of Oklahoma on July 1, 1995, pursuant to a Certificate of Convenience and Necessity or grandfathered authority. INTEGRATED SERVICES DIGITAL NETWORK (ISDN) - the extension of the digital transmission capabilities and common channel signaling concepts of the public telephone network to the customer premises. Defines a standard set of services, interfaces, and protocols for interoperability. Two access interfaces, called user-tonetwork interfaces, are defined for ISDN: Basic Rate Interface (BRI) and Primary Rate Interface (PRI). INTEREXCHANGE TELECOMMUNICATIONS CARRIER (IXC) - any person, firm, partnership, corporation, or other entity, except incumbent LECs, resellers, or OSPs, engaged in furnishing regulated interexchange telecommunications services under the jurisdiction of the Commission. INTEREXCHANGE TELECOMMUNICATIONS SERVICE - telecommunications service provided between locations within different certified exchanges. INTERLATA - any call that is originated in one LATA and terminated in another LATA. INTRALATA - any call that is originated and terminated within the boundaries of the same LATA, regardless of whether such call crosses LATA boundaries prior to reaching its termination point. April 5, 2005 Page 3 of 52

12 Public Utility Division Cause No. PUD INTERSTATE TOLL - any call that is originated in one state and terminated within the boundaries of another state. INTRASTATE TOLL - any call that is originated and terminated within the boundaries of the State of Oklahoma, regardless of whether such call crosses state boundaries prior to reaching its termination point. LATA - Local Access and Transport Area, as defined in the Code of Federal Regulations, Title 47 Part LONG RUN INCREMENTAL COST (LRIC) - the long run, forward-looking additional cost caused by providing all volume-sensitive and volume-insensitive inputs required to provide the total demand associated with a service or network element offered as a service, using economically efficient current technology efficiently deployed. LRIC also equals the cost avoided, in the long run, when a service or network element offered as a service is no longer produced. LRIC excludes costs directly and solely attributable to the production of other services or network elements offered as services, and unattributable costs which are incurred in common for all the services supplied by the firm. The long run means a period long enough so that the cost estimates are based on the assumption that all inputs are variable. LOCAL EXCHANGE - the telephone company exchange where subscriber lines are terminated and switched. Also called an End Office, Wire Center, or Central Office. NON FACILITIES-BASED CLECS - CLECs that do not directly own, control, operate, or manage conduits, ducts, poles, wires, cables, instruments, switches, appurtenances or appliances in connection with or to facilitate communications within the local exchange portion of the public switched network NANPA - the North American Numbering Plan Administration. NANPA is the organization with overall responsibility for the neutral administration of North American Numbering Plan (NANP) resources, subject to directives from regulatory authorities in the countries that share the NANP. NANPA's responsibilities include assignment of NANP resources, and, in the U.S. and its territories, coordination of area code relief planning and collection of utilization and forecast data. NUMBER PORTABILITY - as pertaining to wireline services, the ability of end-users of telecommunications services to retain, within the same rate center, their existing phone number without impairment of quality, reliability or convenience when switching from one telecommunications service provider to another. NTIA - National Telecommunications and Information Administration. OCC (or COMMISSION) - the Oklahoma Corporation Commission. April 5, 2005 Page 4 of 52

13 Public Utility Division Cause No. PUD OKLAHOMA PLAN - an alternative regulation plan that conforms to Part 11 located at O.A.C. 165: et al. OPERATOR SERVICE PROVIDER (OSP) - any common carrier that provides intrastate operator services or any other person or entity determined by the Commission to be providing operator services. PACKAGING - the sale of two or more services offered by or in conjunction with the services of a TSP to a customer of a TSP for a single price. PRIMARY UNIVERSAL SERVICE - an access line and dial tone provided to the premises of a residential or business customer, which provides for two-way switched or dedicated communications in the local calling area without usage-sensitive charges, including: (a) a primary directory listing; (b) dual-tone multifrequency signaling; (c) access to operator services; (d) access to directory assistance; (e) access to telecommunications relay services for the hearing impaired; (f) access to 911; and (g) access to interexchange long distance service. PRIVATE LINE SERVICE - dedicated circuits or channels or switching arrangements, whether virtual or physical, which provide interexchange communications between specific locations. PUD (or PUD STAFF or STAFF) - the Staff of the Public Utility Division of the Oklahoma Corporation Commission. RATE CENTER - a geographic area that is used to determine whether a given call is local or toll. RBHC (OR RBOC) - Regional Bell Holding Company (or Regional Bell Operating Company). RESELLER - any person, partnership, cooperative corporation, corporation, or lawful entity that offers telecommunications services to the public through the use of the transmission facilities of other carriers or a combination of its own facilities and the transmission facilities of other carriers for resale to the public for profit. SPECIAL UNIVERSAL SERVICE - a program component of the Oklahoma Universal Service Fund. Special Universal Services include the provision of: (a) one incoming tollfree phone number and up to a total of five access lines provided free of charge to a notfor-profit hospital, public school building, public library or county seat; (b) one access line with the ability to connect to an Internet service provider at 56 kbps, or the equivalent credit, provided free of charge to a public school building; and (c) one telecommunications line or wireless connection provided free of charge to a not-for-profit April 5, 2005 Page 5 of 52

14 Public Utility Division Cause No. PUD hospital 1 sufficient for providing such telemedicine services as the hospital is equipped to provide. SUBSCRIBER LINE - the telephone line connecting the local telephone company central office to the subscriber. TELECOMMUNICATIONS SERVICE PROVIDER (TSP) - any authorized provider of local exchange service, whether an incumbent ILEC or a competitive CLEC. TELRIC - Total Element Long Run Incremental Cost, or the long run, forward-looking replacement cost of an element. TRO - the Triennial Review Order issued by the FCC in CC Docket Nos ; 96-98; and UNBUNDLING - the provision of nondiscriminatory access to network elements on an unbundled basis at any technically feasible point based on rates, terms and conditions that are just, reasonable and nondiscriminatory. UNBUNDLED NETWORK ELEMENT (UNE) - a component of the ILEC s telecommunications network utilized to provide telecommunications services. UNE-L - a local loop network element that is a transmission facility between the main distributing frame (MDF) in a LEC central office and the point of demarcation at an enduser s premises. This element allows for the transmission of the CLEC s telecommunication services when connected to the CLEC s switch equipment. UNE-P - a combination of unbundled network elements (UNEs) that allow end-to-end service delivery without the requirement of CLEC-owned facilities. VOICE OVER INTERNET PROTOCOL (VoIP) - a method of converting voice signals into data packets, which are routed over the Internet or a similar network. WIRELESS CARRIER - any person engaged as a common carrier for hire, in interstate or foreign communications by wire or radio or interstate or foreign radio transmission of energy, including but not limited to, commercial mobile radio service (CMRS), cellular & personal cellular service (PCS) providers. 1 Pending legislative approval of proposed OCC rules (RM ), this definition will be expanded to include eligible healthcare entities, which will include county health departments, city-county health departments and federally qualified health centers in Oklahoma. April 5, 2005 Page 6 of 52

15 Public Utility Division Cause No. PUD I. BACKGROUND/PURPOSE FOR STUDY The Oklahoma Legislature adopted Senate Concurrent Resolution 74 2 (SCR 74) on May 26, SCR 74 created the Task Force on the Deregulation of the Oklahoma Telecommunications Service Provider Industry (Task Force). The Task Force was charged with advising the Oklahoma Legislature in its efforts to determine the necessity and feasibility of abolishing certain statutory provisions, relating to the telecommunications service provider industry in the State of Oklahoma. 3 On November 12, 2004, pursuant to the Task Force Report issued from its October 21, 2004 meeting, the Task Force made the following recommendations: 1. The Task Force on the Deregulation of the Oklahoma Telecommunications Service Provider Industry recommends that the Oklahoma Corporation Commission, pursuant to its constitutional and statutory regulatory authority, continue to conduct proceedings to determine the appropriate regulation of telecommunications service providers. The Oklahoma Corporation Commission should take such actions it deems to be in the best interests of the public. 2. The Oklahoma Legislature, with its Constitutional authority to make, amend and repeal law, should continue its oversight of regulatory issues relating to telecommunications services and consider such legislative proposals it determines to be appropriate during its regular legislative session. 3. The Oklahoma Corporation Commission should, upon completion of the proceedings and actions taken pursuant to Recommendation 1 hereof, make a report to the members of the Task Force at a meeting to be called by the Chair or by such other means as the Chair determines to be appropriate, consistent with the provisions of Senate Concurrent Resolution 74. At its October 28, 2004, Commission Signing Agenda, Staff s potential action regarding SCR 74 was discussed. Staff subsequently filed an Application 4 on December 1, 2004, to study the telecommunications industry in Oklahoma, with a focus on competition and related issues. It was further agreed that a Commission investigation into the level of competition in Oklahoma would best support the charge given to the Task Force. Upon completion of its investigation, the Commission will report its findings to the Task Force, in support of the Task Force s advisory role to the Oklahoma Legislature established by SCR 74. Staff s Study was designed to include, but not be limited to, the following: 2 See Appendix 1. 3 Report of the Task Force on Deregulation of the Oklahoma Telecommunications Services Provider Industry, November 12, 2004, 1. 4 Cause No. PUD April 5, 2005 Page 7 of 52

16 Public Utility Division Cause No. PUD Providing an overview of existing telecommunications service provider industry regulations; 2. Assessing the strengths and weaknesses of the existing industry regulations; 3. Examining how telecommunications service provider deregulation in the State of Oklahoma could impact consumers, rates, industry competition, delivery and efficiency of services, potential industry growth, research and technological advancements, telecommunications service provider industry workforce, investment by telecommunications service providers in the states, telecommunications service infrastructure, and the economy of the state; 4. Determining ways in which the State of Oklahoma can deregulate the telecommunications service provider industry that will have the greatest positive impact on consumers in terms of rates, equipment, access to services and promoting equity of competition among telecommunications service providers; 5. Ascertaining if there are any final recommendations of previous task forces, commissions, working groups, associations or other entities that have previously undertaken studies of the telecommunications service provider industry deregulation efforts within the preceding ten (10) years. The Task Force shall determine the extent to which any of such recommendations have been implemented pursuant to changes in either State law or policy, and to the extent possible, the Task Force shall determine whether the implementation of the recommendations from such prior studies was effective; and 6. Developing recommendations specifically intended to assist the Oklahoma State Legislature to determine the necessity and appropriateness of enacting legislation deregulating the telecommunications service provider industry. Such recommendations shall result in, but not be limited to: a. improving telecommunications services to consumers in all rural and metropolitan areas of the state, b. ensuring equity of rates for consumers in all rural and metropolitan areas of the state, c. promoting fairness in competition among the telecommunications service providers offering services in all rural and metropolitan areas of the state, and d. encouraging a healthy climate for economic growth in the telecommunications service provider industry throughout the State of Oklahoma. Further, the Commission should, upon completion of the proceedings and actions taken pursuant to the charge from the Task Force, make a report to the members of the Task Force, consistent with the provisions of SCR 74. April 5, 2005 Page 8 of 52

17 II. SURVEY APPROACH & DESIGN Oklahoma Corporation Commission Public Utility Division Cause No. PUD In order to collect, analyze and reconcile the data required from industry participants, Staff issued four Data Requests 5 and conducted three Technical Conferences. The Technical Conferences were open to all industry participants and the general public. Concurrent with the filing of its Application, Staff issued Data Request (DR) #1 to all providers of telecommunications service in Oklahoma. Because the DR included questions targeted to all segments of the service provider industry, it was issued to all known carriers operating in the state. The list of 543 recipients included ILECs, CLECs, Wireless, IXCs, Resellers, OSPs and others. Staff received replies to the various data requests from 234 service providers, for an overall 43% response rate, broken down as follows: 76 CLECs, 70 Resellers, 45 ILECs, 18 IXCs, 9 Wireless Service Providers, 7 Operator Service Providers, 4 Inmate Service Providers, 2 Prepaid Service Providers, 2 Payphone Service Providers, and 1 Directory Assistance Provider. The information requested by Staff included general input about the nature of regulations and competition in Oklahoma as well as specific data relating to revenue, line counts, capital expenditures, local rates, broadband deployment and universal service support. Staff compiled all of the comments submitted by respondents in its Respondent Comment Matrix. 6 On January 19, 2005, DR #2 was issued to ILECs and CLECs to ascertain the number and types of CLECs operating in each exchange/rate center in Oklahoma. ILECs were asked to provide the name of each CLEC operating in their exchanges, along with the number of wholesale lines provided to each CLEC on a UNE-P, UNE-L or total resale basis. At the same time, CLECs were asked to identify the exchanges where they operate, the number of retail lines provided to end users in each exchange and the method of provisioning service, whether UNE-P, UNE-L, resale or via company-owned facilities. While the total number of wholesale lines reported by ILECs proved to be reasonably comparable to counts reported to the FCC, exchange-specific discrepancies could not be completely reconciled due to the fact that some CLECs objected to the ILECs providing this information and other CLECs did not respond at all. 5 See Appendix 2. 6 See Appendix 3. April 5, 2005 Page 9 of 52

18 Public Utility Division Cause No. PUD DR #3 was issued on February 8, 2005, to examine the physical presence of carriers in Oklahoma and the level of corporate activity in attracting and retaining customers. This DR requested total annual advertising expenditures incurred to market services to Oklahoma customers, the number of business offices and permanent staff, and an explanation of any actions taken to respond to competitive market forces. On February 23, 2005, DR #4 was issued to ensure that data submitted by carriers in response to DR #2 was developed under a consistent set of assumptions. Staff performed checks for reasonableness by comparing the DR responses to annual reports provided to the Commission, FCC reports and statistics, public filings and corporate annual reports. To ensure that the revenue analysis was not distorted, intrastate retail revenue data reported to the OUSF Fund Manager, NECA Services, Inc., was used as a proxy for 12 of the 25 largest carriers operating in Oklahoma (11 wireless carriers and 1 CLEC) that did not respond to Staff s initial or follow-up requests for information. Additionally, due to the low response rate from wireless carriers, FCC data was incorporated into Staff s analysis of total subscribership levels to ensure that no material statistics were excluded. For the sake of clarity, it should be noted that Commission Rules define a Facilities-Based Provider, as it relates to the definition for Competitive Test, as an entity providing service predominantly through the use of its own facilities, including UNEs. Staff s analysis in this proceeding followed a more granular approach and separated UNE-P, Resale and Facilities-Based CLECs. When referenced in this Study, Facilities-Based CLECs or Providers are those with company-owned facilities and UNE-P based CLECs are separately identified. April 5, 2005 Page 10 of 52

19 Public Utility Division Cause No. PUD III. HISTORY OF OKLAHOMA TELECOM REGULATION SINCE 1996 Introduction On February 8, 1996, the federal government adopted the Telecommunications Act of 1996 (amending the Communications Act of 1934). As a result, the regulatory environment in all states was fundamentally changed. In its Fiscal Year 1996 Annual Report, the FCC described the Federal Telecom Act: The Telecommunications Act reflects a bipartisan consensus that introducing competition and then deregulating America s largest monopolized markets offers numerous potential benefits for residential consumers, business users, communications companies, and the economy as a whole. The new era of competition in telecommunications promised by the 1996 Act can be one of new investment in advanced telecommunications and information technologies and services, job growth, lower prices, improved services and increased choices for consumers. 7 Since 1996, Oklahoma has responded to the challenges posed by implementation of the requirements of the Telecom Act. Oklahoma was one of the first states to adopt comprehensive rules for certificating local service competitors. In the intervening years, the Oklahoma Corporation Commission adopted various measures to foster competition: Implemented provisions of the Oklahoma Telecommunications Act of (Oklahoma Act); Established and set administrative procedures for certain funds related to universal service, low-income assistance, and 911 services; Streamlined filing procedures; Approved alternative forms of regulation other than the traditional rate of return model; Revised procedures for managing numbering resources being depleted by competitive pressures; and Launched initiatives to promote high-speed data services, culminating in agreements with providers to invest in broadband deployment throughout the state. FISCAL YEARS 1996 to 1998: RESPONDING TO THE FEDERAL TELECOM ACT (FTA) The Oklahoma Act (originally introduced as House Bill 1815) was enacted during the 1997 session of the Oklahoma Legislature and required the Commission to take certain actions to facilitate implementation of local exchange service competition and to establish certain funds to facilitate competition and provide universal consumer access to telecommunications services. 7 Federal Communications Commission, 62nd Annual Report - FY 1996, accessed at 8 O.S. 17, April 5, 2005 Page 11 of 52

20 Public Utility Division Cause No. PUD Staff filed a Rulemaking on March 5, 1997, to adopt streamlined regulations for certain tariff changes of telecommunications providers and to adopt a rule related to alternative regulation. Other 1997 Rulemakings involved clarifying rules and procedures for long distance resellers and operator service providers, changing the requirements to obtain a certification to operate in Oklahoma, and establishing operating requirements for payphone service providers. As a result of federal and state regulatory changes, there was a massive influx of individuals and companies seeking certification during the 1997 fiscal year. By the end of the year, the Public Utility Division (PUD) regulated 493 public utility service providers - up 138% from the total of 207 providers a year earlier. The Oklahoma Act also required the Commission to establish and administer the Oklahoma Universal Service Fund (OUSF), the Oklahoma Lifeline Program, and the Enhanced 911 Program. Emergency rules were developed and approved by the Governor to meet the legislative requirements for these funds. Throughout 1998, the Commission conducted hearings and processed cases dealing with the following issues required by the Federal Telecom Act: Interconnection agreements and arbitrations; SBC Oklahoma s compliance with Section 271 of the Federal Telecom Act regarding provision of interlata service in an in-region state; Implementation of number portability equal access; Competition dockets related to costing and pricing of SBC Oklahoma services; Payphone service deregulation on rate changes following FCC actions; and Designation of federal Universal Service eligibility. Another issue that came to prominence during 1997 was the management of limited numbering resources. Demand for phone numbers from new competitors created a shortage of useable numbers in the 405 area code, driving PUD to adopt a relief plan for the 405 Numbering Plan Area (NPA). Industry filed a Petition 9 in April 1997 to consider various relief plans, and as a result, the 580 Area Code was introduced in November FISCAL YEAR 1999: PROMOTING A MORE COMPETITIVE ENVIRONMENT By the end of Fiscal Year 1999, the PUD regulated 710 public utilities, continuing the trend of numerous new competitors entering the Oklahoma market. SBC Oklahoma s efforts to obtain authorization to provide interlata long distance service to the customers in its service territory picked up speed. The Federal Telecom Act required the FCC to consult with state commissions regarding a 14-point checklist before making a determination as to whether a Bell Operating Company (BOC) 9 Cause No. PUD , Order No April 5, 2005 Page 12 of 52

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